Comparative History: 2012 vs. 1998
The first quarter of 2012 was a stunner in the equity markets, giving us the best first quarter since 1998, which begs the question, what did 1998 look like relative to 2012?
|Sector trends||Beginnings of an enormously impactful internet revolution||Banking sector still struggling, corporation cash at record levels in response to continued economic uncertainty coupled with political volatility.|
|Federal Government Spending||Relatively controlled with a 0.7% of GDP surplus||Federal spending is at the highest percent of GDP in history outside of a world war with a projected budget deficit for 2012 nearing 9% of GDP|
|Federal politics||Stable||Political infighting of Montague and Capulet quality|
|Economic growth||Sustained 4+% GDP growth rate||Sub 2%, weak and slowing|
|Industry capacity utilization||82.8%||78.4% (Significant excess capacity)|
|Housing||Strong and growing||23% of homeowners are underwater with prices still falling with a mortgage process more invasive than a colonoscopy|
|Labor markets||Unemployment 4.5%Percent of the population employed 67.1%||Unemployment 8.3%Percent of the population employed 63.8%|
|Consumer confidence||Conference Board measure 131.7||Conference Board measure 70.2|
|Central Bank||Stable and predictable with a balance sheet of $500 billion rising at 5% annual rate with 4+% GDP growth rate||Unpredictable and in unchartered territory with a balance sheet of over $3 trillion rising at a 20% annual rate with sub 2% GDP growth|
|Inflation as measured by CPI||1.6% (Significantly less than GDP growth)||3.0% (Above GDP growth)|
|Risk-free rate||4.9% (Positive real returns with CPI)||0.09% (Negative real returns with CPI)|
We must also take into consideration the weather, which has given us not only an exceptionally warm January and February, but this past March was reportedly the warmest on record! The Easter bunny will arrive two weeks earlier than last year as well, which makes the third-biggest buying holiday in the U.S., (behind Christmas and Valentine’s Day) likely to help support economic data in the coming weeks.
If we look a little deeper at the markets, Apple rose 48% in the recent rally and is responsible for nearly 20% of the appreciation in the S&P500. It represents 4% of the S&P 500’s market capitalization and 11% of the Nasdaq! Divergence is everywhere, meaning there is no clear, consistent trend despite the headlines. Small and mid cap stocks, the broader NYSC composite, transports, the Baltic Dry Index and Treasury yields have not made new highs, contrary to what would be expected in a true bull run.
With Q1 earnings season barely a month away, the stock market will need to see $108 on operating EPS (earnings per share) to justify the market at its current price to earnings level (P/E). Current consensus is for $105 and my calculations tell me that is overly optimistic.
Bottom Line: Don’t let the tail wag the dog. The markets have become increasingly dependent on monetary stimulus while often disregarding economic and investment specific fundamentals. On Tuesday April 3rd, the Federal Open Markets Committee (FOMC) notes revealed that the committee believes the economy is strengthening, which led the markets to believe that another round of quantitative easing is less likely. Stock indices immediately took a turn towards the downside and volatility rose. We work within markets in which bad news is good and good news is bad. When the markets do not reflect the same reality as the macroeconomic fundamentals, guess which one eventually wins?